When It Rains It Pours
By FREDERIC G. MARKS
Opinions from outside Barron’s staff: This week, a playbook for how to fix Medicare. Changing related tax laws would be a start.
This year, the first cohort of the large baby-boom generation, born from 1946 through 1964, reaches age 65 and becomes eligible for Medicare. This will further strain Medicare’s already weak finances, highlighting flaws in all of American health care: Government insurance has become too expensive, and private insurance is unaffordable or unavailable for those who become seriously ill.
Six federal health-insurance programs, of which Medicare is the largest and most significant, cover nearly half the U.S. population. Health-care insurance through employment or individual insurance covers another 38% of Americans, and about 15% have no health insurance.
Medicare provides open-ended, unfunded promises to pay benefits, bank-rolled partly by a dedicated payroll tax and mostly by general-fund taxes and borrowing.
In contrast, insurance companies employ actuaries and underwriters to estimate future expenses and charge appropriate premiums to ensure that money is available to provide the benefits promised.
But in Medicare, the insurers are the taxpayers, with the government administering the program. Medicare has no assets other than future obligations of taxpayers. Medicare’s trustees report that the program faces $38 trillion in unfunded future liabilities ($330,000 per U.S. household).
Medicare’s dire financial condition is due to its design and operation. Medicare payroll taxes are far too low to fund the benefits promised. And fraudulent claims account for 20% to 30% of Medicare expenditures. Medicare’s payment methods allow abuse by way of repeated charges for unnecessary procedures and supplies. Private insurance companies experience far lower losses from fraud and abuse.
Cutting payments to hospitals and physicians is no solution for the financial woes of Medicare. The program already pays less than the costs of hospitals and many physicians—who then try to shift the unreimbursed costs to privately insured patients. That is one of the major causes for the alarming escalation in the price of private insurance, which has been rising 12% a year. Many physicians refuse to accept new patients if they are on Medicare. Cutting payments to physicians will further limit access to their services.
Medicare specifies 467 medical conditions for which it will pay. Unfortunately, Medicare doesn’t allow much payment for a primary- care physician spending quality time with a patient to evaluate his condition, decide on treatment or make appropriate referrals to specialists.
Insurance companies and Medicaid follow Medicare’s lead. Consequently, primary-care physicians earn about half the average for other physicians, and they work about 80 hours a week. No wonder the number of primary-care physicians is shrinking, as they leave that field in order to retrain in a specialty or to retire early.
A CENTURY AGO, ANNUAL HEALTH-CARE spending was about 1% of gross domestic product. Today, it is 17%. Much of the growth in spending is due to the increased availability of insurance after the early 1940s, when a change in the federal income-tax laws made employer-paid health insurance extremely attractive in comparison to the tax treatment for individuals buying their own insurance. An entitlement mentality developed, in which people who are insured give little or no thought to the medical costs they are incurring because they don’t pay much of the cost.
The advent of Medicare in 1965 reinforced this mentality. Medicare provides extremely low-cost coverage for senior citizens. That is why it’s so popular. But Medicare expenses in 1970 were twice what Congress had estimated they would be just three years earlier, and by 1990 Medicare expenses were nine times higher than a 1970 estimate for anticipated 1990 costs.
There are solutions for these problems, although some may find them controversial:
• Change the tax laws to give individuals the benefit now received by employers who pay health insurance for their workers: an unlimited tax deduction for the cost of the coverage. This would promote individual ownership of health insurance, which insurers could then offer, as they do with life insurance, on a noncancellable and guaranteed-renewable basis, notwithstanding adverse health changes. Individuals could select the extent of coverage, deductibles and copayments, as they do now with automobile insurance.
• Convert Medicare (and similar federal programs) to annual grants of vouchers on the Treasury, good for payment of private-insurance premiums for coverage guaranteed to be issued and noncancellable. The Treasury’s liability would be limited to the cost of each year’s vouchers. The risk of future cost increases would be assumed by insurance companies and the insured.
• Issue vouchers only to people with income below a specified level, because those with higher incomes have the means to pay for their own insurance.
Some will surely oppose such changes, on the grounds that it is not fair to people who have already paid for their Medicare via past payroll taxes. Fairness, like beauty, is in the eye of the beholder. It would also be unfair to allow Medicare to go broke, or to consume the lion’s share of federal revenue.
According to advice to the U.S. government from the International Monetary Fund, Medicare benefits cannot be paid over the long-term future unless benefits are cut in half or taxes are doubled. Such benefit cuts would greatly damage health care for senior citizens, and such a tax increase would thrust an unsupportable burden on younger people.